AB 1513: What the new California piece-rate ‘safe harbor’ law means for your business

For California employers who use a piece-rate compensation system, a new law called AB 1513 codifies significant changes to how they must pay their employees for time spent on so-called “non-productive” activities — and potentially bring relief from liability for past violations.

A piece rate system is any pay scheme that pays the employee a fixed amount per unit produced (e.g., per unit assembled) or per action performed (e.g., per mile driven), regardless of how long the employee spent on the task. Piece-rate pay is common in numerous industries, including “on demand” services, transportation, agriculture, installation services, automotive repair and many others.

The new law was passed in response to recent California court decisions that retroactively created liability for unpaid wages and penalties for employers who use piece-rate compensation systems. The courts held that a piece rate pay system was in violation of California wage and hour laws if it did not provide the employee with separate, additional compensation for time spent on rest and recovery periods, and other “non-productive” activities (i.e., any activity other than the specific task “paid for” by the piece-rate pay, e.g., cleaning, reworks, etc.).

Rest and recovery periods

AB 1513 now requires that piece-rate employees be paid for rest and recovery periods and any other “non-productive” time at an hourly rate that is no less than the legal minimum wage or the average hourly rate for the same pay period, whichever is higher.

In addition, the employee’s pay stub must reflect the total number of compensable “non-productive” hours worked by the employee, and the applicable rate of pay and gross wages for such periods.

In addition, the law also created a “safe harbor” period that allows employers to become compliant with the new requirements, while limiting their exposure to past liability provided certain conditions are met.

In order to avoid liability for certain kinds of damages and penalties available under state law, an employer must: (a) by no later than July 1, 2016, provide written notice to the Department of Industrial Relations of the company’s election to make such payment under the “safe harbor” law, (b) by no later than Dec. 15, 2016, provide compensation for past uncompensated time from July 1, 2012 to Dec. 31, 2015 to current and former employees who were paid on a piece rate basis during those time periods but were not compensated for rest periods, recovery periods or other “unproductive time,” and (c) provide certain specified notices to the affected employees regarding the compensation being provided under the “safe harbor” law.

Taking advantage of this “safe harbor” provision gives an employer facing potential liability (especially in the context of a class action lawsuit) significant protections. This includes avoiding penalties and liquidated damages under various provisions of the Labor Code, including the potentially disastrous penalties that can be assessed under the Private Attorneys General Act of 2004 (Labor Code section 2699).

Don’t despair

Many employers who have used piece rate compensation systems without any issue for years will find that the new requirements are too impractical, burdensome or expensive for their businesses now.

However, they need not despair as there are several alternatives available that enable them to protect themselves from potential liability, while still incentivizing and rewarding their employees for achieving high productivity levels.

Because the changes will affect each business differently, owners and managers should be sure to consult with employment counsel on the best way to manage these changes.

David Szwarcsztejn is an attorney in the Orange County office of Carothers DiSante & Freudenberger LLP, an award-winning California labor and employment law firm. Szwarcsztejn represents California employers in a wide variety of employment claims, including wrongful termination, wage and hour violations, discrimination, harassment, breach of contract, trade secrets, fraud and unfair competition. He also works with clients on employee workplace solutions, advice and training. He can be reached at [email protected] or (949) 622-1661.

The state’s new minimum wage law may cause employers to fret a bit

On July 1, 2014, California’s minimum wage increased to $9 per hour — but there are some related issues that could have a larger impact on businesses than the increase in wages.

The minimum wage increase not only raises regular and overtime wages, it also affects the classification standards of “overtime exempt” employees. In most cases, exempt employees must be paid a monthly salary that exceeds at least twice the minimum wage.

“The concern is that employers will not take that into account. Because exempt employees are not hourly, employers may not go back and see whether that salary translates to at least the minimum wage per hour,” says Wendy E. Lane, a partner at Greenberg Glusker.

Smart Business spoke with Lane about how the new wage law is affecting California employers.

What possible hazards should employers be aware of with the new wage law?

The law carries a huge potential for class action liability. The minimum base salary for employees to be exempt of overtime, meal and rest period obligations under three of the major exemptions — administrative, executive and professional — has now been raised because the minimum salary for those exemptions is based on a factor of two times the minimum wage.

As of July 1, in order to qualify for these exemptions, an employee must earn $3,120 per month, which is $37,440 annually. Employees must also meet certain ‘duties’ criteria in addition to being paid a salary of at least double the minimum wage.

The liability is that bigger companies with a large number of exempt employees all in the same boat likely could have a potentially sizeable class action suit.

How should employers examine their exempt employee situation?

While there are many factors that go into determining if an employee is exempt, including their level of expertise, training, and discretion, if they don’t meet the minimum salary requirement everything else is irrelevant.

A high-ranking employee could be in charge of other employees and make key company decisions. But if  he or she is not meeting the minimum salary test, the employee cannot be classified as exempt.

Then, if the employee you had treated as exempt worked more than eight hours in a day or more than 40 hours in the week, they were working overtime, but you hadn’t been paying them overtime. They probably worked through at least some of their meal breaks.

There are considerable penalties for having not properly paid overtime or provided the meal breaks because, in effect, you have been treating a nonexempt employee as exempt.

These cases are even harder to defend because most employers may say, ‘If they are exempt, we don’t need to track their time.’ Well, how do you prove there was or was not overtime if you don’t have timesheets? It suddenly becomes much more difficult, and the presumption is against the employer under California law.

What impact could the new law have on a company’s bottom line?

Obviously, the additional cost is a concern to employers, but it needs to be weighed against the cost of retraining a person. Let’s say that some employees were let go in order to pay for this raise at the lower level. Retraining somebody also carries costs.

There are also arguments that as people make more, they may no longer have to choose between food, rent or medicine — and may have more cash to contribute toward prevention and health care — which may improve the employee’s status with respect to attendance issues and sick time.

Employers must find ways to use the minimum wage increase to their benefit as this may be just the first of several minimum wage increases that will be going into effect.

Employers should consult with counsel as they make difficult decisions, such as lowering salaries of employees or terminating employees to be able to afford this change in the minimum wage.

Companies need to ensure they don’t make personnel decisions that will inadvertently expose them to greater liability (such as for claims of discrimination or retaliation) because they are not looking at the big picture as to whom they are selecting.

Insights Legal Affairs is brought to you by Greenberg Glusker

How to achieve your business goals by conducting an annual financial checkup

Pamela Campbell, Senior vice president, San Diego regional manager, California Bank & Trust

While executives generally recognize the need for a good accountant or lawyer, they often overlook the importance of a strong banking relationship. A bank not only provides the banking services and funds needed to grow, experienced bankers can provide expertise and the financial solutions you need to stay ahead of the competition.

“Your banker can provide a competitive advantage for your company by being a valuable resource for financial expertise,” says Pamela Campbell, senior vice president and San Diego regional manager for California Bank & Trust. “An annual checkup is a great way to see what you could be missing.”

Smart Business spoke with Campbell about the benefits of periodically evaluating your banking relationship.

Why is it important to evaluate your banking relationship on a periodic basis?

Professional bankers can identify potential barriers to success and proactively recommend a customized range of solutions before the need arises. They anticipate your needs as a result of taking time upfront and on a regular basis to meet with you to understand the specifics of your business. They tap into and share industry knowledge and ideally are given the opportunity to analyze your financial position through receipt and review of financial statements. For instance, if your goal is to market products overseas, your banker should, first, understand your goals and, second, suggest appropriate international banking services that will help make your strategic transition into new markets more effective. The relationship you build with your banker today can eliminate uncertainty and assist in achieving your immediate and long-term goals. This forward planning eliminates unnecessary stress and will yield dividends down the road.

What should executives consider when evaluating their banking relationship?

It’s critical to consider not only your business’s current needs, but also its future aspirations by asking these questions:

Is your banker responsive and knowledgeable? Do you have someone at your bank you can rely on when your banker is not available? Your banker, along with the support of his or her team, should return your calls, texts and emails, and take responsibility to answer any questions or solve problems that may arise. He or she should not only understand your industry but also be able to identify appropriate solutions and take a hands-on role in helping you solve your business problems through referral to professionals within your community.

Is the senior management team local and accessible? The fate of your loan may reside with a group of distant strangers. Having the ability to meet the local management team and share your business plan is an important part of building a solid banking relationship.

Is your banker willing to invest time in building a relationship? Does your banker engage in an ongoing dialogue with you? Is he or she willing to meet on a regular basis or whenever the need arises? It takes two willing parties to have a productive relationship.

Can your banker explain the bank’s lending philosophy? If your banker cannot do this, he or she won’t be as effective in serving as your advocate during the loan approval process. A seasoned banker, within a reasonably short period of time, should be able to determine whether the bank will be able to support your company’s lending needs. Their ability to review a transaction upfront and identify the strengths, and mitigate any potential weaknesses, will save your company time and provide the clarity to plan for the future.

Is your banker invested in the local community? They will then not only understand the market and economy but also be committed to the success of their clients.

What would executives hope to uncover or discover during this evaluation process?

The evaluation should reveal whether your bank’s vision, policies, philosophy and staff align with the strategic direction of your company. Determine whether your bank possesses the credit appetite, expertise and services to grow with your company. For example, some banks may not be a good fit because they cater to a specific industry niche or maybe don’t offer the services you need to sell your products online or overseas. Your evaluation should reinforce your decision to stay or highlight the need for change.

What shows that changing banks is warranted?

First, do you have a banker assigned to your relationship? Your banker should be someone you can count on to solve problems, respond to requests in a timely manner, offer guidance, and even refer you to additional resources like attorneys, accountants and/or consultants who can help you develop and/or execute on a financial forecast or a business plan. Your banker should be part of a team of professionals you can rely on for support. You should consider a change if your current banker is unwilling to spend time with you, is nonresponsive when you have a request, or can’t explain the pros and cons of various loan or deposit products or what you need to do to qualify for them. If your bank can’t deliver when opportunities arise, you may need a different bank.

What should executives consider when selecting a new bank?

Certainly services and fees are important, but also consider the bank’s niche, its structure, and chemistry with the management team and staff. A community-oriented bank familiar with your industry may be the best bet for small to mid-sized companies because it is committed to helping the region thrive. This understanding of the local community combined with access to banking professionals who support your company with personalized service and proactive solutions will help you achieve your goals. A solid banking relationship reduces stress and helps you focus on the execution of daily activities. There’s no need to settle for a transaction-oriented bank when it’s possible to gain a competitive advantage through relationship banking.

Pamela Campbell is senior vice president and regional manager for California Bank & Trust. Reach her at (858) 623-1930 or [email protected]

 Insights Banking & Finance is brought to you by California Bank & Trust

Stockton, Calif., files bankruptcy petition; largest in U.S. history

STOCKTON, Calif., Fri Jun 29, 2012 – Stockton, Calif., became the largest city to file for bankruptcy in U.S. history on Thursday, after years of fiscal mismanagement and a housing market crash left it unable to pay its workers, pensioners and bondholders.

The filing, announced by the city of 300,000 people, followed three months of confidential talks between the city and its creditors aimed at averting bankruptcy.

“We are now a Chapter 9 debtor,” said Marc Levinson, a lawyer representing Stockton, noting he filed the city’s voluntary petition in U.S. Bankruptcy Court for the Eastern District of California in Sacramento, California as Case 12-32118.

Levinson said pleadings in support of Stockton’s eligibility for Chapter 9 bankruptcy will be filed on Friday.

“We are extremely disappointed that we have been unable to avoid bankruptcy,” Mayor Ann Johnston said in a statement. “This is what we must do to get our fiscal house in order and protect the safety and welfare of our citizens.”

The negotiations ended on Monday with Stockton failing to win enough concessions to help close its shortfall for the fiscal year starting on July 1.

“Our general fund resources are depleted, and we cannot allow the city to spiral into uncontrolled default,” City Manager Bob Deis said. “Bankruptcy stops a barrage of lawsuits and allows the city breathing room while working toward a plan of adjustment and moving Stockton forward.”

The filing of Chapter 9 bankruptcy, a rare event for the U.S. municipal issuers, was left as the only option to close a deficit of $26 million for the budget of the new fiscal year.

The budget suspends $10.2 million in debt payments and cuts employee compensation and retiree benefits by $11.2 million. About $7 million in savings would come from cutting retiree medical benefits for one year. The retiree medical benefits will be eventually eliminated.

Stockton becomes the nation’s most populous to file for Chapter 9 bankruptcy. But Jefferson County, Ala., remains the biggest in terms of debt outstanding, as it had a debt load exceeding $4 billion when it filed in 2011. Stockton has about $700 million in bond debt.

California subpoenas Bank of America over mortgages, according to report

SACRAMENTO, Calif. ― The California attorney general’s office subpoenaed Bank of America Corp this week about the sale and marketing of troubled mortgage-backed securities to investors in the state, the Los Angeles Times reported.

The state is trying to determine whether the bank and Countrywide Financial had sold the securities to investors under false pretenses, the paper reported, citing a person familiar with the matter.

Bank of America bought Countrywide in 2008, leaving itself with billions in losses from soured loans and lawsuits.

The subpoenas come as state attorneys general and federal officials are negotiating a broad mortgage settlement with Bank of America and other major lenders. California reportedly walked away from those talks two weeks ago, although it is possible the state could still sign onto an agreement.

Bank of America declined to comment to Reuters.

The company’s shares were down 2.8 percent at $6.22 in morning trading.

California’s prison needs to attract investors; idea needs traction

SAN FRANCISCO ― The Golden State may be ushering in a golden era for investing in jails.

California’s prisons “realignment” begins this month with counties taking charge of low-level felons to help unclog state prisons, which are under court order to ease overcrowding.

Thinning the most populous U.S. state’s prison population involves setting free 30,000 inmates. That will require county sheriffs and probation officers to manage many who run afoul of the law, along with nonviolent offenders.

But California’s cash-strapped government has not cemented funds for its realignment program for the long haul. It has state money only through this fiscal year, raising the prospect of an unfunded mandate that worsens crowding in local jails.

“We’re estimating about 1,200 individuals will be released to San Diego County in the first year,” said Don Steuer, chief financial officer for San Diego County. “By the end of the second-year implementation, we’re looking at between 2,000 and 4,000.”

But as for permanent funds, “We don’t see it right now,” Steuer said. “It just adds to the uncertainty.”

Money for adding space for more felons locally will be critical for public safety, said Assemblyman Anthony Portantino: “It’s going to lead to the early release of inmates without any infrastructure to deal with it.”

Counties do have some funds available for adding correctional facilities, but not much, said Nick Warner of the Sacramento, California advocacy firm Warner & Pank Llc.

“There is $650 million in unused bond authority that will be available to counties,” said Warner, who represents the California sheriffs’ association. “But it’s probably only going to cover a sliver of the statewide need.”

That opens the door to counties selling additional bonds on their own, said Michael Harling of Dallas-based investment bank Municipal Capital Markets Group Inc, which has done about 60 financing deals over the last decade for correctional projects.

Selling bonds to build out jails and treatment centers may, however, be easier said than done because local voters may balk at taking on debt to boost spending on felons.

“Financing for schools or parks is more emotionally appealing,” said Steven Frates of the Davenport Institute at Pepperdine University’s School of Public Policy.

Buddy Johns of CGL Capital Solutions Llc aims to put into play a third option: Bypass the bond market and let investors build jails that counties can lease and eventually take over.

“We’re trying to simplify it for speed purposes,” said Johns, president of the Scottsdale, Arizona-based sister company to corrections facilities planner Carter Goble Lee.

Johns’s idea may raise eyebrows in California, where so-called public-private partnerships allowing investors to build public infrastructure have not gained much traction.

However, local governments’ financial woes may prompt a new look at the tie-ups, which Johns aims to promote with a team of architecture, engineering, construction, law and consulting firms.

Their effort will not include proposals for private management of correctional facilities, which would guarantee a bitter political fight with unionized guards.

“We’re not suggesting that the private sector take over any management services,” Johns said. “I want to stay out of politics. All I want to do is a good financing model for what they need.”

Johns has lined up investors, who expect returns on leases slightly higher than returns on county general obligation debt. The group also aims to impress counties with offers to maintain facilities it builds and to take on their project risks.

“If we think it’s going to be an $80 million jail and it turns out to be a $95 million project, that’s our problem,” Johns said.